2013 (10) TMI 430 - HC - Income Tax

Rate Tax on long term capital gain - tax rate of 10% without indexation - Sale of equity shares - Availability of benefit of proviso to Section 112(1) of the Act Held that - The proviso to Section 112(1) of the Act does not state that an assessee, who avails benefits of the first proviso to Section 48, is not entitled to benefit of lower rate of tax @ 10%. The said benefit cannot be denied because the second proviso to Section 48 is not applicable. The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long-term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48. Inflation indexation shall be ignored. In case the Legislature wanted to deny the said advantage/benefit where the assessee had taken benefit of the first proviso to Section 48, it was easy and this would have been specifically stipulated, that an assessee, who takes advantage of neutralization of exchange rate fluctuation under the first proviso to Section 48 would not be entitled to pay lower rate of tax @10%. Legislature had a far easier and simpler way to deny benefit of the proviso to Section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit. It is not possible to decipher and clearly elucidate the exact legislative purpose and object behind the proviso to Section 112(1) in a categorical and unambiguous manner. The purpose and object behind the proviso to Section 112(1) itself is somewhat debatable, except that the legislative intention was to tax long-term capital gain on listed shares, bonds and units @ 10%, without benefit of indexation under second proviso to Section 48 of the Act. Legislative policy and object is nothing more, and it is impermissible to read into the said provision an affirmative legislative intention on assumption and guess work and this would be beyond the acceptable principles of interpretation. Further, Certainty is integral to rule of law. Certainty and stability form the basis foundation of any fiscal laws Reliance has been placed upon the judgment in the case of Vodafone International Holding B.V. Vs. Union of India, 2012 (1) TMI 52 - SUPREME COURT OF INDIA , wherein Hon ble Supreme Court observed that foreign direct investment flows towards a location with a strong governance infrastructure which includes enforcement of laws and how well the legal system work. There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. Authority should follow their earlier view, unless there are strong grounds and reasons to take a contrary view, but in the present case there is no compelling justification and reason to override and disturb the earlier view - Petitioner will be entitled to benefit of proviso to Section 112(1) of the Act on sale of equity shares - Other conditions of first proviso to Section 112(1) of the Act are satisfied Decided in favor of Assessee.

Issues Involved:
1. Applicability of the proviso to Section 112(1) of the Income Tax Act, 1961.
2. Interpretation of Sections 48 and 112(1) of the Income Tax Act, 1961.
3. Whether the petitioner is liable to pay tax at the rate of 10% or 20% on long-term capital gains.

Issue-wise Detailed Analysis:

1. Applicability of the Proviso to Section 112(1):
The core issue revolves around whether the petitioner, a non-resident company, can benefit from the lower tax rate of 10% on long-term capital gains as per the proviso to Section 112(1) of the Income Tax Act, 1961. The petitioner sold equity shares of Cairn India Limited and claimed the benefit of the lower tax rate under this proviso.

The petitioner argued that they are covered by the proviso to Section 112(1) as they are not taking the benefit of indexation under the second proviso to Section 48. The assets sold were listed securities, satisfying the statutory requirement. The proviso to Section 112(1) does not stipulate that an assessee must be entitled to the benefit of the second proviso to Section 48 to avail the lower tax rate. The petitioner's view was supported by previous AAR decisions.

The Revenue contended that the second proviso to Section 48 should be applicable to an assessee before the proviso to Section 112(1) could be applied. They argued that the legislative intent was to deny the benefit of the lower tax rate to those who have already availed the benefit of the first proviso to Section 48.

2. Interpretation of Sections 48 and 112(1):
The court had to interpret the provisions of Sections 48 and 112(1) to resolve the dispute. Section 48 deals with the mode of computation of capital gains, while Section 112(1) specifies the tax rates applicable to long-term capital gains.

Section 48's first proviso applies to non-residents and neutralizes exchange rate fluctuations. The second proviso provides for indexation to neutralize inflation but is not applicable to non-residents covered by the first proviso. Section 112(1) specifies a 20% tax rate on long-term capital gains for non-residents but includes a proviso allowing a 10% rate for listed securities, units, or zero-coupon bonds without indexation benefits.

The court noted that the language of the proviso to Section 112(1) syntactically and grammatically mandates one interpretation. It does not state that an assessee who avails benefits of the first proviso to Section 48 is not entitled to the lower tax rate of 10%. The court emphasized that the legislative intent is best reflected in the words used, and there was no clear legislative intent to deny the benefit of the proviso to Section 112(1) to those who have availed the first proviso to Section 48.

3. Tax Rate on Long-term Capital Gains:
The court examined the reasoning of AAR in the impugned order and the earlier decision in Timken France SAS. The AAR in the impugned order adopted a contextual or purposive interpretation, whereas the Timken France SAS decision followed a literal interpretation.

The court favored the literal interpretation in Timken France SAS, stating that the proviso to Section 112(1) applies to all assessees, including non-residents, without exclusion. The court rejected the Revenue's argument that the proviso to Section 112(1) should only apply if the second proviso to Section 48 is applicable. The court highlighted that the legislative intent was to tax long-term capital gains on listed securities at 10% without indexation benefits.

The court concluded that the benefits under the first and second provisos to Section 48 are not identical and serve different purposes. The first proviso neutralizes exchange rate fluctuations, while the second proviso neutralizes inflation. The court also noted the importance of certainty and consistency in tax law interpretation, emphasizing that the earlier AAR decisions had been accepted by the Revenue, and there was no compelling reason to deviate from them.

Conclusion:
The court allowed the writ petition, quashing the impugned AAR decision and declaring that the petitioner is entitled to the benefit of the proviso to Section 112(1) of the Income Tax Act, 1961, on the sale of equity shares. The petitioner will be liable to pay tax at the rate of 10% on the long-term capital gains, as the other conditions of the proviso to Section 112(1) were satisfied. The writ petition was disposed of with no order as to costs.

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